JEDDAH, 10 December 2007 — Depreciating dollar has played its role in spurring the oil prices recently. As long as the dollar bashing continues, crude prices will continue to move upward. At the moment, there are no signs of letup in dollar fall, according to Barrel on the Roll report released by the Riyadh-based Falcom Financial Services.
Crude oil prices briefly crossed $99 per barrel last month before retreating. Volatility in prices notwithstanding, crude is showing an upward bias. Dynamics of oil are beyond simple demand, supply and logistics.
Falcom anticipates crude prices to pass the important milestone of $100 per barrel before the end of 2007.
The Falcom report said the Federal Reserve action of reducing interest rates released the pressure on crude market. Anticipation of further cuts and focus on economic growth as against inflationary pressures earlier, have boosted the prospects of sustainable demand.
Prices are further buttressed by the pegging of the Gulf Cooperation Council (GCC) currencies (except Kuwait) with US dollar. Speculative money in search of safe haven has also fueled oil in recent times. The report said fears of US subprime loan crisis becoming a drag on financial markets, fall in crude demand on rising prices, better stocks in the US than a year before and shift to alternative sources of energy have had little impact on oil prices so far.
Fundamentals do not justify current run, according to the OPEC (Organization for Petroleum Exporting Countries).
The OPEC has decided to maintain the group’s current output of 27.25 million barrels per day at a close-door meeting held at Abu Dhabi’s Emirates Palace Hotel on Wednesday.
“Having reviewed the oil market outlook, including the overall demand supply projections for the year 2008 ... the conference observed that market fundamentals have essentially remained unchanged, with the market continuing to be well supplied,” said an OPEC statement released after the meeting.
According to current estimates, more than three-quarters of the world’s oil reserves are located in the OPEC countries. Their proven reserves currently stand well above 900 billion barrels. The bulk of these reserves are located in the Middle East, with Saudi Arabia, Iran and Iraq contributing 56 percent to the OPEC total. Most analysts underestimated the strength in demand. So far, any drop in the US demand is adequately compensated by higher consumption in the Middle East and China. Subsidized pricing by the governments in these countries may change at some point in future amid rising prices. China has already raised the fuel prices by 10 percent on Nov. 1. India is expected to follow suit.
According to the Falcom report, geopolitical conditions in the oil producing region first came under strain when the US was looking to enter Iraq in 2003. Disturbances in Nigeria and Sudan, US-Iran nuclear standoff, Israel-Lebanon war, changing policies in Venezuela and emergence of Russian backing to the prices have at various points offered valuable support to the oil market.
Globally, strong liquidity conditions are in place for over five years. Lower cost of funds has greatly extended the bullish run in the oil market.
Moreover, spare production capacity is limited and shared by few players. Despite well-stocked US inventories, traditionally higher demand in the fourth quarter due to winter season raises concerns over future replenishment.
Snehdeep Fulzele, head of research at Falcom, said “OPEC has played a key role in balancing demand and supply. Shortage of refining capacity in the world, weather conditions and demand surge from emerging economies of India and China have put pressure on the supply side.”
The world, however, is divided over the repercussions of the most vital source of energy making a transition to the three-figure mark. The journey of oil from under $20 per barrel in 1999 to the current level has been to the chagrin of energy consumers. The largest importer of oil and consumer of energy in the world, the United States led the protests followed by new engines of world growth, China and India.
China imports more than 30 percent of its oil. PetroChina recently became the world’s largest company by market value and the first to cross $1 trillion mark. Growing presence of China in Africa and bilateral ties with Middle East are the pointers to its long-term strategy.
The report said about 100 Indian companies have invested more than $2.5 billion in Sudan, led by the public oil company, ONGC Videsh, which recently built a 700-km pipeline project in the country. On the other hand, alternative sources of energy and efforts to curtail consumption have found little takers. As a result, demand has soared to an all-time high.
“Increased demand from Asia, higher oil prices, reduced spare capacity in the Middle East, wavering inventory in United States, insufficient refining capacity at the global level and tense geopolitical dynamics of the oil producing region are not new. These signs were visible for at least a few years. What caught most analysts off-guard was the dominant world demand,” Fulzele said. According to the International Energy Agency (IEA), demand in 2008 will increase by 2.1 million barrels per day against 85.9 million barrels per day in 2007, demand in 2008 is anticipated to be 88 million barrels.
Global crude refinery output was seen falling in October to a seasonal low of 73 million barrels per day. IEA has in its recent report revised the demand for 2008 downwards to 87.69 million bpd. This is less by 300,000 bpd from its estimate last month.
The Falcom report said oil demand is expected to rise by 2 percent every year up to 2012. Estimates of future projections vary. Some put the estimated demand in 25 years to 140 million barrels per day.
“Speculative money has entered the commodities. Subprime loan crisis has made not just crude oil but also gold an eye-catching destination. This artificial demand has boosted the price as well,” Fulzele said.